With today’s inflated real estate prices, many hopeful home owners are stuck renting as they experience difficulties securing home finance as they don’t pass the bank’s strict lending criteria and others, simply can not afford a large cash deposit. Especially with the increase in the interest rates yesterday!

It would be great to use some of the rent you pay the landlord, but that will never happen or will it?

Rent-to-own is a well-established technique for helping people purchase property and is becoming increasingly popular as house prices spiral upwards. Put simply, rent-to-own allows you to rent your home whilst you are also paying it off. Most rent to owns also have a ‘walk away clause‘ so if you find after a while of living in the property you do not like it or you have decided to move to another area, you are able to walk away from the transaction.

There are major benefits to house purchasers using a rent-to-own system:

• Any accrued equity in the house price belongs to the purchaser, which isn’t the case for people who rent as it is the landlord who benefits from increasing house prices.
• Rent to own plans are normally established with small deposits and some do not even require a deposit.
• Rent to own purchasers are able to decorate the house without the previous consent of the landlord.

Self-employed individuals, new citizens to Australia, those who do not have a valid savings record and those with past credit issues are able to become home owners through rent-to-own plans.

An example of rent-to-own is as follows;

1. A purchaser rents a house at $250 per week for four years and simultaneously pays a small weekly amount to the owner towards the house purchase deposit.
2. After four years the agreed price of the house is acquired through external finance and the house ownership is transferred.
3. The amount still outstanding to the seller is the agreed price of the property less deductions made for agreed applied rent credits

Everyone knows what a lease is and for the people who do not know; it is an agreement to occupy a premises in return for a payment each week, fortnight or month. They are very strict rules and regulations set forth by our governments to ensure everyone is protected.

As always the ‘occupant or tenant’ is very well protected by  the tenancy act. in each state.

An option is the right to buy something for a predetermined price sometime in the future. You ‘buy’ the option, but are not obligated to buy the item it related to. Usually you will get a time frame and in real estate this is all negotiable upon the terms and the parties involved.

OK, so now what is a Lease Option?

Well a lease with a right to buy it later. These are a great way to buy into real estate if you are a ‘lay-by’ or a ‘try before you buy’ kind of buyer.
They are also a great way to secure a price until you save enough deposit, sell your house or refinance something else of value. Investors love them as they don’t have to go an get pre-approved for another loan. They can buy the option, wait for a year or so them on sell the option to someone else for the difference between the value of the option and the real growth of the market.

I like the fact you can buy and sell on a lease option.

You find a vendor who wants to sell on a lease option at say $300 per week.So that means you ‘rent’ the property for the time frame you both decide on.

• Option fee is $5000 for 3 years, with the right to extend for another year if required. This is not a bond, but rather a option fee. NON REFUNDABLE.
• Property is ‘optioned’ for $290,000.

You then advertise and find a Buyer who is willing to buy on the rent to buy or lease option.

• They are willing to rent from you at $350 per week.
• Option fee is $5000 for 2 years, again NON REFUNDABLE
• Property is optioned for $310,000

You can see that $50 per week over 2 years is some great pocket money. Namely $5200. Sometimes you can even negotiate that any payments you make in the form of rent are credited to your ‘optioned’ amount.

So your option is $290,000 and you make $300 per week for 104 weeks = $31,200.
This can be negotiated to be taken off your amount payable upon settling on the property at your optioned price.
$290,000 - $36,200 (option fee + rent) = $258,800.

Also on the other end of this you can credit your new buyer either half or all of the rent they pay too! Again this is great for them also as they are then credited with $36,400 at the settlement table. This is more than the required deposit back when they originally signed up for the option in the first place.

The real cash is the $20,000 you have made between what you optioned the house for and what the new buyer has got the option for. Irrespective of the rent credits the figures are very similar.

The buyer of the option will be able to go to the bank and get a loan straight away in some cases as the value of the property will have most likely increased with natural market movement.

Just remember that the way real estate agents sell houses is not the only way to get things done.

The best part is you have not had to go and get approved and be paying mortgage repayments to the banks.
How many deals like this can you do? if your not sure the answer is unlimited!!

POINTS TO NOTE
The option buyer is also not obligated to buy anything and the option fee is not a deposit for the house, just the right to buy the house.

ou may find it hard to purchase on a rent to buy as some peoples mortgage will be higher than the rent, so be prepared to negotiate hard to get it over the line. Sell the idea to the vendor that you will cover his payments in return for a full rent credit off the option price.

Optioning the South East Of Queensland

Don Christie

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